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Saturday, January 21, 2017

MANAGEMENT SPECIAL........ BUILDING TRUST WHILE CUTTING COSTS

BUILDING TRUST WHILE CUTTING COSTS

During a restructuring, rumors spread and fear
takes hold. You can reduce turmoil by finding ways to inform, empower, and
inspire employees.

“Everything went quiet.” That’s how one manager described the
workplace immediately after his company announced a large-scale restructuring —
and it’s an all-too-familiar scenario to employees whose companies have engaged
in a cost reduction initiative. Decisions are being made at the highest level
of management, but little is known outside that inner circle. Employees
still need to do their jobs: serving their external and internal clients,
meeting deadlines, and moving existing projects and plans forward. But that’s
easier said than done in the face of uncertainty. Worse still, no one can be
sure that a slash-and-burn cost-cutting exercise will accomplish its
intended result. Often, these efforts weaken a company instead of positioning
it to grow effectively.

Restructuring initiatives can have a debilitating effect on the
hearts and minds of employees, affecting those who stay as well as those who
are let go. In our work with dozens of organizations implementing sweeping
cost-cutting programs, we have observed firsthand the turmoil that employees
experience — and how frequently their needs are forgotten during the crucial
work of planning for the transformation.

But what if the restructuring were more than a slash and burn?
What if it appealed to hope instead of fear? What if it not only promised, but
actually delivered, a stronger company and a better place to work? Cost
management is effective only when it leads to a less sclerotic, more
aspirational enterprise — one without suffocating bureaucracy or
micromanagement, in which initiative and entrepreneurship are encouraged and
rewarded, internal processes serve the customers and employees instead of “the
process” itself, and the company outperforms the competition consistently. If
the restructuring doesn’t help the company get stronger — if it doesn’t lead to
a better way of working for everyone in it — then it probably wasn’t worth
conducting the exercise in the first place, because the effects won’t last.

Company leaders embarking on a cost management effort therefore
face two challenges. First, they have to make the right sort of promise to
employees: that cost reductions will be not only fair, but also productive.
This transformation is not intended simply to permit the company to survive a
few more years — it is intended to set the company on a path to greater prosperity
and thus better jobs for those who remain.

Second, leaders have to deliver. They can’t just embark on a
project out of desperation. They have to have a credible way to move the
company forward, and to make cuts that will serve that goal. The only way to
accomplish this is to start with strategy — to have a clear idea of which
activities are truly critical to the company’s success, and which are
distractions or merely nice to have — and to follow through by cutting costs to
grow stronger.

To be sure, many in your company — not just employees, but some
senior executives as well — will remain skeptical throughout the early stages
of the process. They know that cost cutting means layoffs, and that these are
devastating to both individuals and teams. You can’t convince them in advance
that you will handle the process differently in the future than your company
has handled it in the past, and few companies have a good track record in this
domain.

The feelings stirred up by an announcement of a cost-cutting
action are powerful, and to help people see beyond them, you’ll need to enlist
the help of your middle and frontline managers. It’s easy to overlook the
important role these individuals play as the restructuring unfolds. It falls to
them to communicate the rationale for the restructuring, to keep morale as high
as possible during the transition, and eventually to lead their part of the
organization to working in a different way. They need your support. Empower
them to communicate and lead, not to just passively watch their departments be
trimmed without a rationale. They can help their people understand the reasons
for the particular choices that were made, and realize that the company, and by
extension most employees, will ultimately be better off as a result. In so
doing, these managers can earn their people’s trust by helping them see that
becoming more efficient and effective is both a path for survival and a better
way to operate.

Yes, it will be hard. Yes, some people will move on. But the
overarching message is a positive one, intertwined with the company’s strategic
identity. What’s more, the decisions made will have a lasting impact: This
won’t be the kind of restructuring that has to be endured every two years. If
you genuinely come out of the exercise with a company that is more competitive
and more agile than it was before, then you have the greatest incentive of all
to offer the employees who remain: a chance to participate in a growing,
vibrant enterprise.

Investment, Not Expenses

In our book, Fit
for Growth: A Guide to Strategic Cost Cutting, Restructuring, and Renewal (Wiley,
2017), we start with the premise that all spending is investment; every cost is
a choice. The secret to unlocking growth through cost reduction in a Fit
for Growth transformation is to make more deliberate choices about
where to invest, focusing on what to keep rather than what to cut. (Fit for
Growth is a registered service mark of PwC Strategy& LLC in the
United States.)

As a company leader, your ability to make these choices wisely
depends on accepting a strategic reality: Some expenses are better than others.
Companies thrive when they focus their investments on a few differentiating
capabilities — the combinations of processes, tools, knowledge, skills, and
organization that consistently deliver value for them and that set their
company apart from others — and reduce expenses everywhere else. The
capabilities at the heart of a company’s strategy are complicated and expensive
enough to require most of the time, money, and attention from top management.
They also require the commitment, skill, and expertise of a host of other
people, at every level of the hierarchy.

Fit for Growth transformations
entail changes to a company’s cost structure, its organization, and the way the
company is run. Many of the moves you might make are familiar: reorganizing
business units or functions, slimming down reporting relationships, expanding
spans of control, centralizing or decentralizing work, digitizing processes,
outsourcing or offshoring, and relocating workforces. Almost certainly, there
will be head-count reductions. But this time, you have a clear and communicable
rationale for every change. You are refocusing the company around the things it
does best, and redirecting spending to the areas that lay the groundwork for
sustainable, long-term growth.

Restructurings of this sort require meticulous planning and
execution to achieve their objectives. They may take a year or two to complete,
led during that period by a transformation team explicitly focused on
translating the strategy into decisions about capability building, cost, and
the organization, and communicating these decisions across the enterprise. This
might sound like an unnecessarily traumatic experience; many companies prefer a
“stealth” approach in which they ask departments to quietly cut costs across
the board, assuming that will be easier for people to accept. But the opposite
is true. By giving the effort the serious play that it deserves, you and your
company’s top management demonstrate that you have a credible view of how to
succeed, that you are fully committed to that view, and that you recognize the
barriers and blocks that have led to decline in the past. Now you are putting
your money where your strategy is.

The transformation proceeds
over three distinct stages, each presenting a different challenge in com­municating
with the workforce. In the first phase, you set the direction for the
restructuring, prioritize which opportunities to pursue, create the case for
change, and express your intent that “this time will be different.” In the
second, you translate your strategic direction into a detailed design for the
future processes, organization, and systems, and develop a plan for moving from
the current to the future state. In the third phase, you enlist the
organization in executing the plan; the detailed design of the transformation
becomes the new normal for the enterprise

Each phase presents
critically important opportunities for managers on the front lines to help
their teams understand the issues at hand, and to make the turmoil more
productive. Many companies that have followed the Fit for Growth approach
have restructured without wreckage, enlisting their employees in the cost
transformation process. They have even come out the other end with employees
appreciating the company in a way they didn’t before. When designed and managed
in this way, large-scale restructuring is a constructive exercise; it can make
your company more competitive, more profitable, and better prepared to grow.

Phase 1: The Case for
Change

“I was very worried about
what was going to happen to me and whether I was going to have a job. No one
was giving me any reassurance. And no one could.”

For people on the receiving end, cost management exercises can
feel like a roller-coaster ride out of control. People naturally think first of
their own job security and the protection of their domain. Phase 1 is a time of
uncertainty for everyone outside the executive team. Questions surround the
vaguely described “project.” There may be an announcement that a major analysis
of the organization and costs is under way, but the specifics are not voiced.
The idea that the company is cutting costs to grow stronger is not clear;
if the company has cut haphazardly or in an across-the-board fashion in the
past, it’s hard to imagine that anything different will happen this time. Nobody
voices the idea that this effort could fix broken processes, eliminate
bureaucracy, or raise the profile of the most successful parts of the business.

Top of Form

Bottom of Form

Only a few employees know with absolute certainty that they are
indispensable. Most feel vulnerable about their own future. Top management may
assume that the highest-ranked performers or those handling seemingly
critical activities will see their own positions as secure. But they
rarely do. Rumors run rampant. Some employees hope that the effort will just
peter out a quarter of the way through, which might have happened in the past.
Others assume that massive layoffs will cripple the company, and those
remaining will end up doing three times as much work as before.

As speculation becomes the dominant topic of discussion in the
office, middle and frontline managers bear the brunt of responsibility for
answering employees’ questions and maintaining morale. But because they aren’t
involved in designing the transformation, they have little idea of what is
going to happen. In fact, they may be unsure about their own jobs. This puts
them in an awkward position. They have to support their people and keep
operations going. They want to address the rumors. But they don’t know what to
say, or even what to think.

Your goal as a company leader in this phase is to avoid all that.
You have to give managers the support and tools they need to be truthful,
transparent, and reasonably optimistic. They need to be able to reinforce the
case for change as communicated by the CEO in everyday language that will
resonate with their team. In addition, they need to find a way to keep their
team focused on day-to-day business.

At the start of the
initiative, there should be a company-wide announcement making the case for
change. Don’t focus yet on cost reduction per se, but on reorientation around
your strategy. In a Fit for Growth transformation, you are
doubling down on the things that have made the company successful in the past
and building them out for greater success in the future. You may want to
articulate the core value proposition, which might never have been expressed in
concise form in the past, and to signal that it is based on what your company
does best.

You can also, at this point, single out a few critical factors
that are already in the company’s culture that you hope to reinforce. The idea
here is not to provide a definitive statement, while there is still much to
define about the specific actions you will take. But you are showing everyone
in the enterprise that you are ready for them to think more strategically, and
laying the groundwork for the phases that follow.

Next, provide some in-depth guidance for managers on communicating
with staff, especially in light of your company’s existing culture and values.
Explicitly encourage them to promote on-the-job behaviors that reinforce
people’s pride in what they do. In an operation focused on customer service,
for example, a manager might launch a customer satisfaction survey and share results
with employees. Give managers ways to increase autonomy and on-the-job
satisfaction, for instance, by allowing employees more latitude in delivering
customer service or improving shop-floor operations.

Some managers will be doing this kind of thing anyway, and you
want to give them reason to believe their engagement will be rewarded. “I
encouraged people to control what they could control, to try to stay positive,
and to focus on their key objectives,” said an IT director at a company that
went through a transformation in 2015. “My feeling was we could all take one of
two roads. We could either sulk, not do the work, or not act in the right way —
in which case we would be making the decision to let us all go much easier and
our fears would become a self-fulfilling prophecy. Or, we could continue to
work on what we were supposed to work on, try to help the company, hope for the
best, and go from there.”

Phase 2: Design and
Dialogue

“There would be days when
everybody was in tears, and nothing had even been announced yet.”

Phase 2 of the restructuring typically kicks off with the public
articulation of a savings target. This is often quite aggressive; it could be
20 percent of operating expenses, or even more. With the target identified,
shared with outside stakeholders, and broken down by function and business unit
(at least internally), the initiative moves into a more intense period.

The employees who hoped in Phase 1 that things would just blow
over now see that’s not the case. A few more people get pulled out of their
day-to-day jobs to help design the detailed cost reduction plans. Some early
savings initiatives, such as hiring freezes and travel restrictions, are
implemented. But they’re inadequate for reaching the targets, and there are no
details on how the company plans to achieve the rest of the cuts.

At this point, people start to act on their anxieties. In some
cases, good people — exactly the people companies want to keep — become
frustrated with the uncertainty about their future, seek opportunities
elsewhere, and leave. Among those who stay, anger and resentment mount.

Managers are concerned on many levels during this phase. They
wonder if they and their long-term colleagues, some of whom are personal
friends, will survive the restructuring. They are concerned about the fate of
their executive sponsors and others who have mentored them; about what it will
take to grow and advance in the restructured organization, should they be
fortunate enough to be offered a position in it; and about whether the new
company will be a good place to build a career. They get no help from the
executive and transformation teams, who are occupied with the overall cost
management priorities.

“There was no talking point we were given that made any real
sense; there was only a talking point to the business piece,” said one manager
we interviewed. “And most employees couldn’t care less about the business piece
when something like this is going on. ‘Talk to me as a human, as part of your
family.’ That’s what people wanted.”

But this time, as you did
in Phase 1, you are going to do things differently. You must give managers the
support they need to address people’s concerns, including their own. That
doesn’t mean playing down the impact, but it does mean painting a clearer picture
of the organization you are creating through the Fit for Growth exercise
— a can-do culture in which people spend more time doing things for customers
and less time managing one another.

Much of each individual manager’s success during this phase comes
down to people skills: the quality of relationships the manager has, and his or
her ability to convey empathy and communicate a realistic optimism. This is the
time for dialogue, for open, deeply felt conversations about choices and the
ways they should be executed. There should always be an aspirational element to
these conversations, with managers asking senior leaders, “Why did we have to
undertake this restructuring? What are we trying to accomplish? How will it
feel to work here when we are done?” As managers start to understand the
strategic rationale supporting the transformation, they can better explain to
their employees how the decisions being made align with the company’s strengths
and priorities (which they ideally already discussed with employees in Phase
1), and how they will position the company well for success in the future.

Explicitly give middle managers the support and encouragement they
need to communicate up the hierarchy — even when sharing difficult messages —
without fear of negative consequences. Executives are often so consumed with
shaping the future that they lose track of the feelings within the organization
at large. Managers need to let them know what’s happening in the trenches, to
help remind them to address the communication vacuum.

Phase 3: The New Normal

“Can we really pull this
off? Can we work this way in the future?”

The conventional approach at the third stage of a restructuring is
familiar: Cuts take place without a clear strategic rationale, people make do
with the resources they have but without changing what work they perform or
how, and the company continues to decline.

In a Fit for Growth exercise,
however, you’ve already laid the groundwork for the company to revive.
Nonetheless, this phase is still very difficult. The challenge facing you is to
get through the transition and pave the way for the “new normal,” the better
system you hope to create.

The transformation is now in high gear. Employees are told how
reporting lines and organizations will change. They may learn of plans to
consolidate functions across business lines or geographies, to implement new
processes or IT systems, to outsource work, to move some work to a new city, or
to shut down entire offices. In some instances, early retirement and enhanced severance
programs are announced, giving employees even more to think about.

Even in the best circumstances, not everybody likes what they
hear. As in previous phases, there will be a lot of bias in how employees
interpret information. Some employees think the changes take the company down
the wrong path. Others are more concerned about their own department than about
the business as a whole. A few are disappointed that the changes don’t go far
enough. To ease these concerns, you should continue to hold conversations about
the strategic direction of the company, but now offer more detail about the
capabilities you have and those you expect to develop.

The question that looms largest for every employee still has not
definitively been answered for many: “Do I have a job?” As this phase begins,
those decisions have not yet been finalized; indeed, you’ll be calling on your
midlevel managers to help make them. Legal and human resources constraints
prevent names from being released until the selection is complete and the
official communications and severance packages are ready. Employees know the
moment is coming, but nothing else.

“You get the pressures of people calling you who are your friends,
saying, ‘Come on now, what’s going on? You’ve got to tell me something. Am I
safe?’” recalled a manager of the period when he was huddled in meetings
related to employee selection. “To have to turn them down” (that is, not be
able to answer them) “is a tough thing.”

Everything connected with staff reductions — the selection of the
people who will end up without jobs, the communication of the unwanted news to
those people, and the process of “managing them out” — is difficult.
Establishing a fair, consistent, and relatively transparent process is
critical. With any luck, your company has taken a rigorous approach to
performance reviews before the transformation, and the existing information can
be used to select who is let go. If not, you may need to deploy a special
assessment to objectively evaluate employees, using it to separate strong,
average, and poor performers. However it is accomplished, the selection process
as layoffs begin must be as objective as possible, and you must avoid any hint
of favoritism or bias. The human resources and legal departments will help line
managers get through this tricky time.

It’s impossible to completely avoid pain during head-count
reductions, but there are ways to minimize the stress. Voluntary severance or
early retirement programs might be undertaken. For those let go, outplacement
services can likewise be useful, both in lifting morale and in encouraging
cooperation.

On the flip side, managers should expect that some of their high
performers will leave in Phase 3, generally for jobs at other companies. Some
employees will put out feelers that turn into offers, and others, especially
middle and senior managers, will be approached by recruiters. Unwanted
attrition is part of the fallout of a transformation. Despite the risk of
losing their top performers, managers have to resist the temptation to make
promises to employees about their jobs during a restructuring. They should
instead continue to discuss the benefits of the transformation to the company
and to the employee.

Managers also face the emotional fallout experienced by the
retained team once their friends and colleagues have been let go. For those who
stay on staff, the relief of knowing they have a job is often quickly followed
by survivors’ guilt. “I felt like I had been hit by a truck when [my closest
colleague and peer] told me that his role had been eliminated and that there
were no additional roles available for qualified talent like himself in the
company going forward,” said a regional vice president of a retail bank. People
decisions will be scrutinized, and conspiracy theories about favoritism may
arise. This dampens team morale and adds to the concerns over what the new
expectations will mean for the remaining employees, how they can perform the
work with a smaller staff, and whether those new expectations are realistic.

Despite the tense, difficult atmosphere of this phase, there is
also an opportunity to set up the company and its employees for success. The
uncertainty that has pervaded the organization now starts to recede. Decisions
about new operating models and the required head-count changes have been
finalized and announced. Implementation teams are formed to act on the
decisions that have been made. Employees at every level see what the new
organization will look like and how individual roles will change. Communication
that was once minimal moves into overdrive, in the form of memos, town hall
meetings, staff meetings, training, and team-building sessions, all to keep
employees informed and engaged.

Thus for all the turmoil, the beginning of Phase 3 represents a
time of relief and renewed optimism. The stage has been set for a recovery of
morale, and people can see the stronger company begin to emerge.

Now managers can begin the more intrinsically rewarding task of
managing and motivating the remaining organization. People need to know that
their former colleagues were treated with dignity and respect, but more
importantly — now that the focus is turning to the future — they need to
understand their role in making the new organization a success. This is a big
turning point in the transformation, both practically and emotionally.

The forward-looking communication that is necessary once a
transformation has reached this stage is not something that can be accomplished
in one or two executive-run town hall meetings, important as those are. There
also need to be targeted team discussions led by the immediate managers whom
the employees trust most. These conversations are already taking place
informally, through the rumor mill. Every department is starting to hear about
new systems or processes they will be implementing. There is talk about changes
in the metrics that employees will be held to, and about the new measures that
will be used to judge their job performance.

This is the time to more explicitly communicate details that have
been discussed only vaguely before; to start implementing the new
organizational structure; and to codify the decision-making process as well as
how information will be shared and how incentives and motivators will be used
to influence behavior. In other words, this is when everybody starts to execute
the changes that were being talked about and worked on a few months earlier
behind closed doors.

The manager is the field leader who will take his or her employees
from the old to the new, helping them learn new processes and systems, adapt to
a new organization structure and hierarchy, and change behaviors to move to a
new way of working. Most if not all managers will face some challenges with
their teams; some employees will need help and coaching to learn the new ways,
others will miss the old and resent having to learn the new.

Give managers the support and coaching they need to demonstrate
leadership to the team — helping them internalize the “why” and the “what” of
the transformation and accept that they will be part of the future. Employees
will know immediately if the manager is not 100 percent committed, and will use
it as an excuse (perhaps subconsciously) not to make the transition. The
manager’s role, then, is to show the employees, in words and actions, that he
or she understands the changes, is convinced that they make sense, and will
adapt as quickly as possible. The manager must be immersed in all of the
organization, process, and systems changes in order to explain them to the team
without hesitating or wavering.

And while managers are patiently supporting the willing, they
must also identify the unwilling. Despite managers’ best attempts, a few
employees may not be able to break with the past. The manager must spot these
naysayers early and help bring them along. Tactics could range from extended
conversations explaining the changes to blunt warnings about the need to
cooperate. And if the behavior does not change, these “derailers” may need to
be let go so they don’t poison the well.

With most transformations, the changes that begin at this point,
with new processes, new ways of doing business, and often a refined strategy,
need to be jump-started in order to take hold. Corporate culture is an
essential tool in making the changes of a transformation stick; such mechanisms
as peer interactions and informal leaders should reinforce the most important
new behaviors.

Sustaining the Path

In most traditional restructuring initiatives, the positive impact
is short-lived as individuals revert to past behaviors and spending habits. No
organization can operate indefinitely in transformation mode; as normalcy
returns, so too do costs and head count. The program management office is
disbanded; the “best and brightest” who staffed the various work streams return
to their normal duties — and the urgency and strict oversight that
characterized the company at the height of the transformation naturally subside.
It can become a vicious circle.

To combat these tendencies,
company leaders will need to design and implement the requisite systems and
processes to manage change and adjust performance accordingly. In a Fit
for Growth transformation, they can do so through several approaches.
Some are strategic and involve tying the planning and budgeting process more
closely to your strategy so that resources are reallocated to your
differentiating capabilities. Others are operational levers that you can apply
to align your cost structure to your strategy on a continual basis. There are
also organizational levers that you can pull to motivate and empower employees
to act in the company’s best financial interest. Last, you can reinforce a
culture and value system that encourages cost-conscious behaviors over the long
haul.

Ultimately, the company’s fortunes rise and fall on the decisions
and trade-offs that individual employees — the managers on the front lines and
the people they lead — make every day. Will those decisions benefit the firm as
a whole or maximize the self-interest of the person making them? The three
phases of change can be managed in such a way that people understand the
strategic rationale for the decisions handed down, even when they are tough,
and clearly understand their role in shaping the new organization. They can
forge ahead, confident that choices were made to enable sustained success. When trust prevails, so does the company’s future.